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Credit Crises, Risk Management Systems and Liquidity Modelling

Listed author(s):
  • Frank Milne

    ()

    (Queen's University)

This paper explores the theoretical structure and implementation of Risk Management systems in Financial Institutions. It uses the current credit crisis as a test of the model's deficiencies. The paper suggests possible modifications to these systems to allow for "liquidity" in asset trading. Also the paper links these modifications to the theory of banking and financial crises and suggests possible ways in which regulators and central banks may exploit or modify RM systems to test for systemic risks.

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File URL: http://jdi.econ.queensu.ca/Working_Papers/papers/jdi_wp_1.pdf
File Function: First version 2008
Download Restriction: no

Paper provided by John Deutsch Institute for the Study of Economic Policy in its series Working Papers with number 1.

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Length: 41 pages
Date of creation: Sep 2008
Handle: RePEc:jdi:wpaper:1
Contact details of provider: Postal:
Dunning Hall, Queen's University, Kingston, Ontario, K7L 3N6

Phone: 613-533-2294
Fax: 613-533-6025
Web page: http://jdi-legacy.econ.queensu.ca/

More information through EDIRC

References listed on IDEAS
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  1. Milne, Frank, 2003. "Finance Theory and Asset Pricing: Second Edition," OUP Catalogue, Oxford University Press, edition 2, number 9780199261079.
  2. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-341.
  3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  4. Jón Daníelsson & Bjørn Jorgensen & Casper Vries & Xiaoguang Yang, 2008. "Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation," Annals of Finance, Springer, vol. 4(3), pages 345-367, July.
  5. Christian Upper, 2007. "Using counterfactual simulations to assess the danger of contagion in interbank markets," BIS Working Papers 234, Bank for International Settlements.
  6. Jón Daníelsson & Jean-Pierre Zigrand, 2008. "Equilibrium asset pricing with systemic risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 293-319, May.
  7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2005. "Predatory Trading," Journal of Finance, American Finance Association, vol. 60(4), pages 1825-1863, 08.
  8. Edirisinghe, Chanaka & Naik, Vasanttilak & Uppal, Raman, 1993. "Optimal Replication of Options with Transactions Costs and Trading Restrictions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 117-138, March.
  9. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics.
  10. Anthony W. Lynch & Pierluigi Balduzzi, 2000. "Predictability and Transaction Costs: The Impact on Rebalancing Rules and Behavior," Journal of Finance, American Finance Association, vol. 55(5), pages 2285-2309, October.
  11. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  12. Gary B. Gorton & Nicholas S. Souleles, 2007. "Special Purpose Vehicles and Securitization," NBER Chapters,in: The Risks of Financial Institutions, pages 549-602 National Bureau of Economic Research, Inc.
  13. U. Çetin & R. Jarrow & P. Protter & M. Warachka, 2008. "Pricing Options in an Extended Black Scholes Economy with Illiquidity: Theory and Empirical Evidence," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 9, pages 185-221 World Scientific Publishing Co. Pte. Ltd..
  14. Danielsson, Jon, 2002. "The emperor has no clothes: Limits to risk modelling," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1273-1296, July.
  15. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
  16. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
  17. Richard K. Green & Susan M. Wachter, 2007. "The housing finance revolution," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 21-67.
  18. Xing Jin & Frank Milne, 1999. "The Existence Of Equilibrium In A Financial Market With Transaction Costs," World Scientific Book Chapters,in: Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar, chapter 14, pages 323-343 World Scientific Publishing Co. Pte. Ltd..
  19. Umut Çetin & Robert A. Jarrow & Philip Protter, 2008. "Liquidity risk and arbitrage pricing theory," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 8, pages 153-183 World Scientific Publishing Co. Pte. Ltd..
  20. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics,in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  21. Edwin H. Neave, 1970. "The Stochastic Cash Balance Problem with Fixed Costs for Increases and Decreases," Management Science, INFORMS, vol. 16(7), pages 472-490, March.
  22. Charles Calomiris & Joseph Mason, 2004. "Credit Card Securitization and Regulatory Arbitrage," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(1), pages 5-27, August.
  23. Jouini Elyes & Kallal Hedi, 1995. "Martingales and Arbitrage in Securities Markets with Transaction Costs," Journal of Economic Theory, Elsevier, vol. 66(1), pages 178-197, June.
  24. Shin, Hyun Song & Adrian, Tobias, 2008. "Financial intermediaries, financial stability and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 287-334.
  25. repec:dau:papers:123456789/5630 is not listed on IDEAS
  26. repec:crs:wpaper:9513 is not listed on IDEAS
  27. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
  28. Viral V. Acharya & Denis Gromb & Tanju Yorulmazer, 2012. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 184-217, April.
  29. Hong Liu, 2004. "Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets," Journal of Finance, American Finance Association, vol. 59(1), pages 289-338, 02.
  30. Bruce Ian Carlin & Miguel Sousa Lobo & S. Viswanathan, 2007. "Episodic Liquidity Crises: Cooperative and Predatory Trading," Journal of Finance, American Finance Association, vol. 62(5), pages 2235-2274, October.
  31. Ashcraft, Adam B. & Schuermann, Til, 2008. "Understanding the Securitization of Subprime Mortgage Credit," Foundations and Trends(R) in Finance, now publishers, vol. 2(3), pages 191-309, June.
  32. Milne, Frank & Shefrin, H. M., 1987. "Information and securities: A note on pareto dominance and the second best," Journal of Economic Theory, Elsevier, vol. 43(2), pages 314-328, December.
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